Dow tumbles most in year, Treasuries rally on budget showdown

Barclays Plc reduced its year-end estimate for the S&P 500 by 5 percent on concern a divided American government will delay the resolution over spending cuts and taxes. Barry Knapp, head of U.S. equity strategy, cut his 2012 forecast for the index to 1,325 from 1,395.

“With a polarized federal government we see little reason to increase the probability of avoiding the tax cliff, avoid brinksmanship over the debt ceiling or to expect pro-growth tax and entitlement reform in 2013,” Knapp wrote in a note to clients today.

Knapp’s Plays

Knapp said that while he “would not be tempted to add risk” in economically-sensitive companies, he would buy stocks with high dividends if they fall on concern that capital-gains tax will increase because the Fed would probably respond to a slowdown created by higher taxes.

Twenty companies in the S&P 500 are due to release earnings today, including Time Warner Inc. and Kraft Foods Group Inc. Earnings have topped estimates at about 72 percent of companies that have reported so far, while 60 percent missed sales projections, data compiled by Bloomberg show.

While Obama received at least 303 electoral votes to Republican Challenger Mitt Romney’s 206, Republicans kept a majority in the House of Representatives. Democrats retained control of the Senate.

The election boosted speculation Federal Reserve Chairman Ben S. Bernanke’s asset-purchase programs will be preserved. Bernanke’s stimulus has helped keep the U.S. economy growing by purchasing $2.3 trillion of Treasuries and mortgage-related bonds and instituting a plan to buy $40 billion of home-loan securities a month. Romney had said he wouldn’t reappoint Bernanke to a third term in 2014.

‘Question This Commitment’

“The alternative was that Governor Romney would get elected, that he would name someone to replace Bernanke and that the markets would question the forward-guidance language, would question QE3, would question this commitment to keep the foot on the accelerator well into the recovery,” Mohamed El-Erian, chief executive officer of Pimco, the world’s biggest manager of bond funds, told Bloomberg Television. “All that hasn’t happened and that’s why I think the Fed will continue to be investors’ best friend.”

The dollar strengthened against 13 of 16 major peers, climbing 0.4 percent to a two-month high of $1.2770 against the euro

The yield on two-year Treasury notes fell four basis points to 0.266 percent, the lowest since Oct. 16. Ten-year yields, benchmarks for mortgages to corporate bonds, fell from 1.75 percent yesterday and extended this year’s decline to about 25 basis points. They have tumbled about 75 basis points since Obama took office.